2018 (1) TMI 451 - AT - Income Tax

Nature of expenditure - replacement of steel rolls - revenue or capital - Held that - We find from the explanation of the aforesaid manufacturing process, steel rolls are not independent machinery but instead they are only part of a rolling mill. It does not contribute for the increase in production capacity of the products manufactured by the assessee company. Hence there is no enduring benefit or advantage derived by the assessee company in this regard. The replacement of steel rolls are merely operational expenses incurred in the ordinary course of business by the assessee. Moreover, from the details of replacement of steel rolls as tabulated hereinabove, it could be safely concluded that the steel rolls were replaced by the assessee on a regular basis and hence we hold that merely because the same is found as a separate line item in the Appendix I of Depreciation Rates Schedule, it does not take the character of capital expenditure automatically. We hold that since it is not a capital expenditure at all vis a vis the facts of the instant case and the manufacturing process involved therein, the explanation to section 30 and 31 of the Act brought into the statute with effect from 1.4.2003 would not be applicable to the facts of the instant case. Expenses in the instant case would have to be treated only as revenue expenditure and we direct accordingly. Hence the Ground No.2 raised by the assessee is allowed.

Summary

Issues:
1. Treatment of replacement of steel rolls as capital expenditure versus revenue expenditure.

Analysis:
The appeal before the Appellate Tribunal ITAT Kolkata concerned the treatment of replacement of steel rolls as capital expenditure or revenue expenditure for the Assessment Year 2010-11. The Assessing Officer (AO) treated the expenditure on steel rolls as capital expenditure due to its enduring benefit, while the assessee claimed it to be revenue expenditure. The only issue to be decided was whether the Commissioner of Income Tax (Appeals) was justified in upholding the treatment of steel rolls as capital expenditure. The assessee argued that the expenditure was incurred solely for business purposes and did not provide enduring benefits. The Tribunal analyzed the manufacturing process of the assessee, where steel rolls were integral to the rolling mill but did not contribute to increasing production capacity. The Tribunal held that the replacement of steel rolls was operational expenses in the ordinary course of business, not resulting in enduring benefits, and thus should be treated as revenue expenditure.

Furthermore, the Tribunal referred to a decision of the Chandigarh Tribunal in a similar case, where it was held that expenditure on replacement of rolls was revenue expenditure as it did not create a capital asset or enduring benefit. This decision was approved by the Punjab & Haryana High Court. The Tribunal found that the replacement of steel rolls in the instant case should be treated as revenue expenditure based on the facts and legal precedents cited. Consequently, the Tribunal allowed Ground No. 2 raised by the assessee, holding that the replacement of steel rolls should be treated as revenue expenditure.

The Tribunal dismissed other grounds raised by the assessee, which were general in nature and did not require specific adjudication. The appeal was partly allowed by the Tribunal, and the order was pronounced on 05.01.2018.